International Harmonization of Accounting Standards - Literature review Example

Name Date Task Tutor INTЕRNАTIОNАL HАRMОNISАTIОN ОF АССОUNTING STАNDАRDS Executive summary International Harmonization of accounting standards is defined as an attempt to combine and bring together different accounting standards and systems from different nations. It is the process of combining different accounting practices into an orderly structure to create a synergistic outcome. The bringing together of financial accounting and reporting standards is viewed as a way of facilitating the current globalization of capital markets by facilitating the ability of investors to make sound decisions for investment alternatives (Dr. Jagannath & Debdas, 2004, p.183). The piece of work below tries to examine the recent regulations in accounting that are put in place to enhance international harmonization in Australia and India and to describe how the two came up with an accounting system that harmonizes with the international standards while at the same time retaining the macroeconomic control. Introduction Growth and development of international trade and capital flows has led to an increased economic integration. Based on these enhancements, there has been an international harmonization of accounting standards depending on many practices, customs and institutions. This has led to many things among them the desire to harmonize and standardize accounting standards among various nations. The harmonization of accounting standards is basically a process which combines and brings together international accounting standards into some kind of agreement so as to achieve a common and agreed upon set of Accounting principles and standards. Harmonization process gives the global community a sense of single unit (Dr. Jagannath & Debdas , 2004, p. 201). If the accounting system can produce general purpose financial statements in reality, then the diversity of stockholding do not matter today. In the due course of the process of globalization, investors have become aware of the capital markets and this has led to an increase in number of investors. The volume of investments by Foreign Institution investors (FIIs) has grown significantly around the globe as well as several Indian companies through GDRs (Global Depository Receipts) and ADRs (American Depository Receipts). Thus, the desire to harmonize accounting standards has greatly been advocated since it facilitates the process of economic decision making. Accounting has also bagged the overall status of the language used in business that demands reporting of affairs in a common way that is understandable and hence the need for convergence of accounting standards that is a very key factor in implementing a single set of these standards across the globe (Ashbaugh, 2001, p.142). Benefits of international harmonization of accounting standards  Improves comparability of financial statements and reports prepared in separate countries as well as providing users of the reports and international markets participants with quality data on investment and credit decisions. Reduces financial costs in analysis of the reports since only common standards are used.  Doing away with the barriers to international capital flows by diminishing the differences in the requirements of financial reporting for the members who participate in international capital markets and boosting the way foreign investors of Australian financial reports understand the issue.  Trimming down the costs of financial reporting that are incurred by the Australian multinational companies and other foreign companies that operate in the country with reports elsewhere.  Enhancing more meaningful assessment of the financial performance and the financial position of the reporting entities in Australia as well as the foreign public sector.  Advancing the quality of financial reporting in Austria to reach the best international practice. Literature review Current status of accounting standard-setting in Australia The Australian standards of accounting were first developed by the professional accounting bodies and were implementable under their set codes of ethics. From the year 1996, these professional bodies worked together with the Australian Accounting Research Foundation (AARF), which definitely involved both the Accounting Standards Board (ACSB) and the Public Sector Accounting Standards Board (PSASB). They jointly worked together to prepare the standards for organizations formed by both private and public sectors (Haswell & McKinnon, 2003, p.78). In the beginning of the year 1984, ASRB was instituted by the Ministerial Council for Companies and Securities to assess and continuously review the standards generated by the profession and enforce them according to the law of the company. This scheme prevailed under the Companies Act 1981 (Cwlth) and corresponding State/Territory Codes. The ASRB and the profession’s Accounting Standards Board (AcSB) merged four years later, with the former continuously are working closely with the PSASB (Alfredson, 2003, p. 163). The ASRB was re-established under the Australian Securities Commission Act 1989 and in two years time it was rebranded the Australian Accounting Standards Board (AASB). Its standards then applied under the Corporations Law. Later in 2000, AASB merged with the PSASB. The new AASB was formally re-established under the Australian Securities and Investments Commission Act 1989 (as it was then re-titled). Other regulatory changes were witnessed like the inclusion of the Financial Reporting Council (FRC) by the Australian Government, to overlook the activities of the AASB. The standards of AASB now operate under the Corporations Act 2001 and it continues to operate under the Australian Securities and Investments Commission Act 2001 (Alfredson, 2003, p.190). The setters of the Australian accounting standard greatly contributed to the development of international accounting standards under the International Accounting Standards Committee (IASC), which was created in the year 1973 and was made the International Accounting Standards Board (IASB) in 2001. The AASB also sought after harmonizing and converging their standards with those of the IASB, and to help the Public Sector Committee (PSC) of the International Federation of Accountants in coming up with the standards for the public sector. The PSC is currently referred to as the International Public Sector Accounting Standards Board (IPSASB) (Haswell & McKinnon, 2003, p.281). In 2002, AASB was given a broad strategic move by the FRC that required the former to adopt the pronouncements issued by the IASB – the International Financial Reporting Standards (IFRSs). Australian equivalents to IFRSs comply with the annual reporting periods beginning on or after 1 January 2005. The AASB has also preserved some domestic standards and interpretations. Status of Indian Accounting Standards India is a member of IASC and the Institute of Chartered Accountants of India (ICAI), is the peak body of accounting and auditing that was constituted an Accounting Standards Board (ASB) on April 21, 1977, to articulate standards on various items of the financial statements. The accounting standards of India currently are of good quality in most cases and in particular are the same as the ones of IAS. Indian government constituted the National Advisory Committee on Accounting Standards (NACAS) in 1999.Hitherto, NACAS has advised the adoption of twenty seven accounting standards developed by ASB. ASB shows support and commitment to adopt IAS and examines various standards that are revised by IASB (Vishwanathan, 2005, p.162). ASB has prepared comparative statement enlisting the IAS with subsequent Indian Accounting Standards, as well as the irrelevant standards in the context of the current economic and business setting (Chowdhury, 2000). Thus far, twenty nine Accounting Standards have been issued by the ICAI as against the 41 International Accounting Standards. There are also five International Financial Reporting Standards (IFRS).ASB has not yet began operations in India and hence the accounting standards that are advocated by ICAI are subject to adaption by every entity who have auditable financial statements. Along the lines of such economic reforms, the accounting system in India was changed from a Soviet-style accounting system to a system that purposes to harmonize with international standards. However, many obstacles still exist and they influence the process of harmonization and developments in accounting. I hereby explore the key role of the State in accounting regulation in India. The State had two purposes of preserving governmental control and harmonizing with the international standards. I examine the involvement of the government in preserving uniform accounting system while at the same time developing standards in accounting that harmonize with the international standards. Convergence process was heavily influenced by the desire of Indian state to incorporate its economy into that of the globe and draw attention of foreign investments. This harmonization faces hurdles as stated earlier like the differences between economic system and accounting tradition (Shri & Chowdhury, 2000, p.122). Issues and challenges in Harmonizing Accounting Standards Despite that all, attaining convergence in accounting standards globally is a difficult task which is bound to number of obstacles to overcome. First, there seems to be unwillingness to adopt the norms of the International Accounting Standards Committee (IASC) in accounting standards which are different in various countries under economic, social, legal and cultural settings. Therefore, diversity in accounting standards exists among different countries around the world. To achieve convergence, an agreement on the central objective of financial reporting must be reached at. The IASB standards are intended to cover the needs of investors as well as the capital markets. However, countries that have varying philosophies in financial reporting find it hard to harmonize their domestic standards with International Financial Reporting Standards (Rivera, 1989, p.189). The quality of the financial reporting depends on the accounting standards’ quality and whether the process of implementation is effective too. Enough regulatory and other bearers are vital in ensuring the standards are properly implemented. There is no guarantee that these standards will be implemented with the same degree in every jurisdiction and expanding this with international standards will raise the issue of principle vs rules. IASB standards are based on principles and hence other countries that have standards which are rules-based probably are considered to experience a considerable difficulty in harmonizing their products with IFRS. In the future there are a number of problems that the IASB and the nations that have adopted IFRS will need to address. These countries face the challenge of shortage of manpower and more specifically that is trained by IFRS such as the accountants (Rivera, 1989, p.243). IFRS in Australia The Australian Accounting Standards Board (AASB) has issued Australian equivalents to IFRS (A-IFRS), that has seen numbering IFRS standards being done as AASB 1–8 and IAS standards as AASB 101–141. Australian equivalents to SIC and IFRIC Interpretations have also been issued together with numeral interpretations and domestic standards. Australia, along with other few European countries, was one of the very first country to adopt IFRS for domestic purposes. IFRS and principally IAS have existed in the accounting standard package in the developing world for many years since the pertinent accounting bodies were more open to adoption of international standards for many reasons including that of capability (Alfredson, 2003, p.201). The AASB continuously reflects changes made by the IASB as domestic pronouncements and has over the recent years issued Amending Standards to quash some of the preliminary changes made to the IFRS text for local terminology differences and reinstated options to eradicate some Australian-specific disclosure. AASB is looking for alternative ways to adopt IFSR in Australia from complains that it can be done without domesticating it (Haswell & McKinnon, 2003, p.290). IFRS IN INDIA The Institute of Chartered Accountants of India (ICAI) has declared that IFRS will be compulsory in India for financial statements on or after 1 April 2011. This will be a revision on the existing accounting standards in order to attune them with IFRS requirements. Reserve Bank of India also declared that the financial statements of the other banks need to comply with IFRS on or after 1 April 2011 (Shri & Chowdhury, 2000, p.122). Companies above Rs.1000 crore according to ICAI will also comply with IFSR from April 2011. The Ministry of Corporate Affairs on January 22, 2010 issued the directives for transition to IFRS. It is clear that India has postponed transition to IFRS by a year due to unpreparedness of its companies. In the first stage, companies that are included in Nifty 50 or BSE Sensex and their securities listed on stock exchanges outside India as well as the other companies with a net worth of Rs 1,000 crore will organize and avail their financial statements using IAS converged with IFRS. The press note issued by the Indian government affirmed that the above companies will prepare their first balance sheet as at April 1, 2011, taking into account the accounting standards that are convergent with IFRS. This implied that the transition date will be April 1, 2011 and this is contrary to the earlier plan that had fixed the transition date at April 1, 2010 although the press note is not clarifying whether the full set of financial statements for the year 2011–2012 will be prepared by complying to the accounting standards convergent with IFRS. This means that India which possesses IT and accounting skills will fail to make the transition to IFRS over last four years (Vishwanathan, 2005, p.162). Conclusion When harmonization in accounting standards is not done, additional cost of financing reporting as well as the difficulties that are faced by multinational groups in the manner they undertake their transactions will be of great concern. The recent advancement in globalization of accounting regulation in India is aimed at implementing its commitment in harmonizing the accounting system. India established the Indian Accounting Standards (GAAP) which complied almost entirely with the standards of the IASB (version 2003). The process of harmonization reduces the differences in accounting practices among countries and this is a case of international concern that is of emphasize now than ever before. IASC is concerning itself to remove the unnecessary differences in accounting principles and practice globally. Devastatingly, the process of harmonization of accounting practices lacks synchronization between the issuing of standards at the national level in different countries and the preparation of the standards by the IASC. This process has had some difficulties to overcome due to the national particularities such as the economic system and culture. International harmonization on the other hand is not an easy job. It involves preserving the national particularities of an accounting system that takes time gradually. Indian accounting regulators have acquired experience through learning in a careful approach by developing and finding ways to adapt or combine the co-existence of IAS and the UAS in the accounting development. The sphere of harmonization is progressing at a great pace and is expected to be higher in future. Bibliography Alfredson, K. 2003. Pathway to 2005 IASB standards. Australian Accounting Review 13(1), 3-8. Ashbaugh, H. 2001. Domestic accounting standards.Journal of Accounting Research, Vol. 39 No. 3, pp. 417-34. Australian Accounting Standards Board, Accounting Standard: Business Combinations, July 2004; www.aasb.com.au/public_docs/aasb_standards_2005/pdf/AASB3_07-04.pdf. Doupnik, T. S. 1987. Evidence of International Harmonization of Financial Reporting. International Journal of Accounting, 23(1), 12-27. Jagannath Hati W & Debdas Rakshit. 2004. Lecturer in Commerce, Syamsundar College, A step (Management accountant, ICWAI .) K. Raji Reddy. 2000. Reader in Commerce, Department of Commerce and Business Management, Kakatiya University. FASB news release .2002. FASB and IASB agree to walk together toward convergence Trojan Horse?. Australian Accounting Review, 13(1), 8-16. Haswell, S. & McKinnon, J. 2003. IASB standards for Australia by 2005. Cambridge University. Rivera, J. M. 1989. The Internationalization of Accounting Standards: Past Problems and Current Perspectives, International Journal of Accounting, 24(4), 320-342. Shri A.K. Chowdhury. 2000. Ph.D., Student, Department of Accounting, University of Western Sydney, Australia Vishwanathan, B. 2005.Indian and International Accounting Standards and Practices: Amazon Publishers. Read More